Executive Summary
The ability to convert inputs into outputs is a critical driver of success in many fields of endeavor. For example, although many academics have interesting and promising ideas, only a few appear to be able to convert them into published articles. In the history of oil exploration, the difference between wildcatters who made vast fortunes and those who died penniless despite exploring in the same area often came down to the percentage of “dry holes” they dug. In Hollywood, the difference between aspiring artists with steady acting incomes and those who must wait tables to make ends meet is the extent to which they convert auditions into acting roles.
This article studies conversion ability in the context of product development. Specifically, the authors address the question, Why are some firms better at converting ideas into launched products than others? The quest to convert ideas (or inventions) into launched products (or innovations) is a central feature of technological progress and economic growth. Whether firms are working out of tiny garages or in sprawling research labs, they sink much hard-won capital into generating inventions and bringing them to market quickly. Every stage of product development adds substantially and cumulatively to costs. These costs have large implications for firms, policy makers, and consumers.
For example, some researchers estimate the average research-and-development cost for a new chemical entity launched in the U.S. pharmaceutical market to be $802 million. Such estimates are frequently used in policy debates and decisions. Part of the reason these estimates are so large and controversial is that they account for the cost of ideas that fail to make it to launch. The odds of a promising idea making it past the various stages of drug development to eventual product launch are, on average, less than one in five.
However, the odds can vary substantially across firms. If this is indeed the case, estimates of development costs per launched product will also vary substantially across firms. Efficiency in product development due to higher conversion rates can yield resource savings that can be reallocated in other ways, such as in lower prices, higher profits, or greater investment in future innovation. Yet differences in conversion rates are rarely discussed in policy debates. The implicit assumption appears to be that firms have little control over conversion rates, and all firms are subject to the same odds of conversion. The drivers of conversion ability remain a mystery, and research on the issue is rare.
As a response to pressures to innovate, many firms have gravitated toward generating larger numbers of promising ideas and increasing the speed with which these ideas are taken to the market. Relatedly, the product development literature has frequently highlighted the virtues of increased speed and increased idea generation. In contrast, the current article proposes that a strong focus on speed and on generating many ideas may actually hurt firms by lowering their conversion ability.
The authors’ analysis of more than 40 years of data on new product development in a cross-national sample of pharmaceutical firms reveals that firms vary widely in their ability to convert promising drug ideas into launched drugs. Firms with the highest conversion ability are those that focus (on a moderate number of ideas, on ideas of importance, in the firms’ areas of expertise) and deliberate (by adopting a moderate level of speed in conversion). Specifically, the authors find the following:
- Speed can kill; more ideas can yield less. The optimal speed is approximately nine years from idea patenting to drug approval. Any speed targets that are set too far below or above this level could be detrimental to the firm’s drug development program. Similarly, in contrast to some prevailing beliefs and practices, working on too many ideas simultaneously is counterproductive for firms. Firms that seek conversion ability may be better off focusing on a moderate number of promising ideas.
- Experience counts. Firms that focus on ideas in technical fields in which they have expertise are better at converting these ideas into approved drugs than firms that do not. These results imply that conversion is greater when firms “stick to their knitting” when it comes to new product development.
- Importance is important. Firms that focus on important ideas have higher conversion ability than firms that do not. The implication of this finding is that when managers are selecting ideas to pursue, they should focus on ideas that have important technical and commercial implications. It would expected that this would be their objective in any case, but it is not uncommon for firms to pursue ideas that might be incremental and, therefore, perceived as low risk. Our findings suggest that the outcome of doing so diminishes the firm’s likelihood of converting ideas. In contrast to incremental ideas, important ideas have the advantage of galvanizing employees and motivating them to view the idea fructify into a finished product. Firms that focus on important ideas will enjoy high conversion ability.
Biography
Rajesh Chandy is Carlson School Professor of Marketing and an associate professor in the Carlson School of Management at the University of Minnesota. He received his PhD from the University of Southern California. His areas of research and teaching include innovation, technology management, and advertising strategy. His publications have appeared in Journal of Marketing Research, Journal of Marketing, and Marketing Science, among others. His research awards include Journal of Marketing’s Harold Maynard Award for contributions to marketing theory and thought, the American Marketing Association Strategy Special Interest Group’s Early Career Award for Contributions to Marketing Strategy, the American Marketing Association Technology and Innovation Special Interest Group Award for the best article on Technology and Innovation, the Marketing Science Institute Alden Clayton Award for the best marketing dissertation proposal, the Mary Kay Award for the best marketing dissertation, and the ISBM dissertation proposal award. His teaching awards at the Carlson School include the 2002–2003 Outstanding Professor of the Year Award, the 2003–2004 Award for Excellence in Teaching, and the 2003–2004 Outstanding Faculty Dedication Award.
Brigitte Hopstaken is a project manager at an independent Strategic Management Communication agency in Amstelveen, the Netherlands, where she is responsible for researching the effectiveness and impact of media campaigns in an international setting. She received her BA and MBA from the University of Maastricht in the Netherlands, after which she spent several years working as a research specialist for the Carlson School of Management at the University of Minnesota.
Om Narasimhan is Assistant Professor of Marketing in the Carlson School of Marketing at the University of Minnesota. His research interests include innovation in high-technology markets, empirical industrial organization issues in channels, and structural models of advertising.
Jaideep Prabhu is Professor of Marketing in the Tanaka Business School at the Imperial College London and has been on the faculty at the University of Cambridge, Tilburg University, and the University of California, Los Angeles. He has a BTech from the Indian Institute of Technology, New Delhi, and a PhD from the University of Southern California. His research interests include radical innovation, competitive interaction, and managerial learning, particularly in high-technology industries, such as biotechnology and pharmaceuticals. His publications have appeared in Journal of Marketing Research, Journal of Marketing, International Journal of Research in Marketing, and Marketing Letters, among others. He has consulted for and taught executives from (among others) British Telecom, Philips, Xerox, ING Bank, and Egg in Colombia, Portugal, Germany, Netherlands, Switzerland, the United States, and the United Kingdom. He has also consulted for the U.K. government’s Department of Trade and Industry, for whom he cowrote a white paper on innovation in the United Kingdom.
J Marketing Research, Volume 43, Number 3, August 2006
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